Why you\’ll be stuck with single-digit stock returns for years

The powerful U.S. bull market is turning five years old, and as if to celebrate, the S&P 500
hit a record high on Tuesday. Are you inclined to light a birthday candle or a memorial candle?

Considering the yearly returns one respected stock strategist expects from the market over the next 10 years, you might want to do both.

The U.S. market advance that started on March 10, 2009 is the second-most powerful bull market in the past 70 years, lagging only the bull that broke out in August 1982 – so far. Yet retail investors have only recently begun to trust stocks again after getting burned in 2008 and early 2009.

Main Street buyers are notoriously latecomers to Wall Street parties, but more retail buyers could find their way into stocks now that mutual funds’ crucial five-year track records show no trace of the 2008 market meltdown, says Jeffrey Kleintop, chief market strategist at LPL Financial. As recently as August 2013, the difference in the five-year annualized return between stocks and bonds was about two percentage points. Nowadays stocks beat bonds over five years by 20 percentage points, because the broken pieces of 2008 have been vacuumed away.

Now that the slate is clean, what can investors expect from the next five or 10 years? Will new stock buyers enjoy anything close to the roughly 25% annualized returns the S&P 500 has delivered since March 2009?

Not likely, Kleintop contends. Historically, a lower-priced market generates higher expected returns, and vice versa. With the S&P 500 priced slightly above-average at 18 times trailing 12-month earnings, U.S. stocks in Kleintop’s view are poised to bring mid- to high-single-digit gains over the next 10 years, plus dividends. And that’s after a possible recession and bear market, he adds.

The Bull is dead. Long live the Bull.

Even then, 5%-9% annualized returns from stocks over the next decade will still beat bonds by a few percentage points, Kleintop predicts. While the stunning double-digit annualized gains since 2009 are behind us, the future isn’t bad. “New investors in the stock market and those that have participated for many years can take heart,” Kleintop says. “We have the potential for a good 10 years to look forward to.”

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